3rd Issue: Master Leasing Requirement – Partners Pardon (Part 1)

3^rd Issue:  Master Leasing Requirement – Partners Pardon (Part 1)

HomeFirst possessed a well-developed compliance program that included a whistleblower policy, an external auditor, a Board of Directors, an Audit Committee, and a Compliance Officer who conducted compliance reviews of the larger government contracts.  In October 2013, I entered what would be my final season of contract compliance reviews.  Housing for Homeless Addicted to Alcohol (HHAA), a program partially funded by HUD that paid rent and provided case management for homeless inebriates, was the first program I reviewed. 

Earlier in the year, HUD had begun requiring HHAA to use “master leasing” arrangements in which HHAA would rent apartments and sublease them to the clients rather than reimbursing clients for rent they paid their landlords directly.  I found that the program violated the new requirement for 36 of 39 clients.  Aware that it skirted the rule, program management inserted printed rationales in the client files: the clients would remain in direct leases for the apartments if landlords might object to master leases.

My report to the program manager, the Chief Program Officer, and CEO Jenny identified the violation, which resulted in our billing for ineligible costs, and recommended prompt correction.  Jenny congratulated the program manager on the great report.  A few days later the Program Officer and Jenny admitted that they had known about the violation before my review and let it go.  In my weekly one-on-one meeting with Jenny, I asked what she thought she was accomplishing by concealing contract violations.  She replied that HUD was planning to get Congress to change the regulation.  The plan was covert, it seemed, because there was no public evidence of its existence.  In any case, a legal change to eliminate the violation would be years away, but there we were.  

Although half of the contract funding came from HUD, making it subject to the new rule, our HHAA contract was with Santa Clara County, whom we had overbilled on two other contracts.  The County was, therefore, ultimately responsible for compliance with the master lease requirement in the program.  But we had two smaller contracts with HUD, called Scattered Site #1 and Scattered Site #2, that imposed the same requirement, and we violated them in the same fashion.

The master leasing requirement complicated our relations with landlords, who were generally comfortable with the idea of leasing to clients and receiving rental payments from us.  But not everyone considered it impractical.  Some who worked closely with HUD believed that master lease arrangements were effective in expanding affordable housing options for homeless people and no change was necessary.  The City of San Jose, a major HomeFirst funder, was looking to into expanding master leasing arrangements in the City.  Whether or not HUD was inclined ever to eliminate the requirement, the San Francisco office of HUD continued to pay us for expenses unrelated to master leases that year.  Although the local office may have lacked legal authority to change terms mandated by federal law, we were happy to accept that as a blessing.

Two types of problems arose in the master leasing violations.  The first was whether our behavior truly constituted a contract violation.  Jenny contended there was no violation because it would be forgiven at a future date.  The line separating right from wrong had shifted once, when non-master leases were made ineligible, so it could shift again.  With or without authority to do so, the local HUD office was agreeable to our billing direct leases and nudged the line in our favor.  Arguing against that understanding was the fact that Jenny and the Program Officer later transferred to another provider clients who did not have master leases. 

The second problem involved the degree of dishonesty involved.  We billed the County and HUD as though the leases were in the proper form, which was not true, but perhaps not serious since they willingly tolerated it.  Adding to the deceit, Jenny and the Program Officer concealed the violations, and program staff dissembled in their documentation of the client files.

HomeFirst, the County, and HUD were all motivated by a desire to help people in need.  No one involved wanted to see clients made homeless because the tedious paperwork of master lease arrangements could not be completed.  HUD had even granted temporary waivers to a few providers, but our Program Officer had missed that deadline.  More selfish motives, at least on our side, included a desire to keep the contract money and jobs in our shop, rather than transfer the contract or clients to a different, compliant provider.  The situation was complicated.

The three contracts involved – HHAA, Scattered Sites #1 and #2 – created a potential overbilling of perhaps $300,000.  But weighed against the desire to avoid harming vulnerable people, was that cost enough to worry about?